IBM Global Technology Services January 2010Managed Business Process ServicesSmart spending: a new approachthat can help you optimize yourprocurement spend
2 Smart spending: a new approach that can help you optimize your procurement spendContents Gaining more value from your 2 Gaining more value from your procurement spend procurement spend Challenging economic times and intense global competition 3 1. Visibility: understanding buying opportunities have placed increased pressure on company balance sheets. More than ever before, businesses are refocusing on core 5 2. Control: improving compliance and spend manage- activities and carefully managing cash. By natural extension, ment across the enterprise this has led to detailed scrutiny of procurement spending with 7 3. Leverage: building value from the strengths of others suppliers—which can equal as much as half of a company’s annual revenue. As pressures continue to mount, businesses10 More than savings—top-line growth must ensure that they are realizing the optimum value from11 Conclusion their procurement spend or they may ﬁnd themselves at a competitive disadvantage.Case studies Many companies are adopting a new approach that is taking 5 Smart spending for year-to-year savings sourcing and procurement to greater levels of value. Smart spending is a broad, multi-faceted way to manage procurement 7 Strategic sourcing helps reduce total annual spend spend; it combines sound, fundamental procurement and ﬁnancial 9 Supplier consolidation helps save on facilities services practices with innovative techniques and greater leverage of spend and infrastructure.10 Smart spending reaps new working capital Smart spending represents the next phase in the evolution of the procurement function by moving beyond the traditional in-house buying and sourcing activities that have served global commerce for many decades. Smart spending gains additional value for businesses by strategically leveraging external capa- bilities to complement and enhance internal procurement functions. Smart spending is helping transform the way companies manage their procurement spend, resulting in improved ﬁnancial per- formance and more competitive businesses.
IBM Global Technology Services 3This comprehensive approach calls upon a variety of ways to 1. Visibility: understanding buyingcapture critical data from numerous sources, integrates that opportunitiesdata across multiple systems and uses it to synthesize action- In order to effectively manage their spend, companies mustable real-time insights. Smart spending comprises three funda- identify what they are spending—and with whom. Soundsmental principles: visibility, control and leverage. pretty basic, yet many companies have incomplete information about their spend proﬁles. This gap often is particularly preva- lent for “indirect” spend (non-core goods and services such as Business Benefits of Smart Spending office supplies and travel). Indirect spend typically amounts to Enterprise Spending Activity 10 percent to 20 percent of a company’s annual revenue and is often purchased through a large number of local suppliers. But visibility extends beyond merely identifying the sources and uses of procurement spend. Also important is an in-depth Visibility knowledge of the suppliers and the attributes of the category marketplaces from which the goods and services are obtained. Control Leverage Additionally, with the advent of a global, interconnected mar- ketplace, the scope and tasks of this type of supplier/market intelligence have grown increasingly more demanding. For example, today’s procurement officers must be acutely aware of supplier risks and social responsibilities that might affect their buying organizations. It is no longer sufficient—or responsible—for companies to simply buy goods and services SMART SPENDING locally. The mandate to identify and manage global sources • Greater savings has increased the complexity and expertise of the procurement • Lower costs function. And, once initial savings have been realized, supplier • Stronger supplier relationships market intelligence becomes even more critical to drive year- • Improved risk management • Top-line business growth to-year savings and improvements.Smart spending uses innovative procurement techniques, sound ﬁnancialpractices and technology while strategically leveraging third-party capa-bilities to achieve greater value from a company’s procurement spendingthan it could obtain on its own.
4 Smart spending: a new approach that can help you optimize your procurement spend Similarly, teaming with a provider that has a sophisticated view of the purchasing activities of your organization—as wellVisibility extends beyond gaining insight as those of many others—can help you spot common themesinto total spend; it enables insight-driven and patterns. It can also help you monitor the full scope of purchases and supplier performance, with alerts for off-catalogbusiness decisions, especially when compa- purchases and direction on how to improve performance. Thisnies team with providers that have strong level of visibility enables you to identify, for example, otheranalytics capabilities in addition to rela- areas that can be folded into procurement services to achieve greater cost savings.tionships with global suppliers.Together these visibility concerns represent a signiﬁcant Companies often can gain better control ofinvestment of expertise and capability for any business. Better indirect spend with the help of third-partyvisibility through smart spending techniques can help easethese complex and costly buying issues with actionable insight, providers that have access to far more dataoften gained through the capabilities of a third-party procure- than they can capture on their own.ment and ﬁnance and administration (F&A) partner.Using solid data to take corrective actionBusinesses often invest in sophisticated tools and processes Your organization can reap added value from a provider’sfor customer relationship management (CRM) to do in-depth investments in these reporting and analytic tools.analyses of customer needs, wants and buying patterns. IBM Business Process Services for procurement, for example,Innovative procurement and ﬁnance providers should apply a works with its renowned research arm to delve deeper into“CRM-like” approach to internal users of procurement procurement analytics and transactional spend data—includingprocesses through advanced analytics. These tools and spending patterns, scope and trends—on a vast scale, not justprocesses identify, monitor and continuously improve savings for individual companies, but across industries and organiza-programs by detecting discrepancies, repetitions, redundan- tions. And not just as a one-time project, but regularly, as acies, errors, omissions—and opportunities. part of an ongoing, structured, end-to-end spend management system.
IBM Global Technology Services 5More important, you can use such data to predict outcomes— 2. Control: improving compliance andand potentially prevent negative consequences. Visibility on spend management across the enterprisethis scale allows you to put market intelligence and corrections The second principle of smart spending—control—beginsinto place quickly, rather than weeks or months post-sourcing, with the comprehensive identiﬁcation of appropriate purchaseplacing power in your hands to reap maximum beneﬁt from and payment channels for all categories of spend. For exam-your provider. Yet this is only one part of a comprehensive ple, many companies have suitable controls over purchasesmart spending strategy. order (PO) processes but experience signiﬁcant “leakage” of uncontrolled spend through non-PO processes, such as credit cards and check requests. Once companies have identiﬁed allSmart spending for year-to-year savings their spending channels, they must implement enforceable policies and practices to manage procurement spend.A large American ﬁnancial institution lacked an overallcorporate telecom strategy. Multiple networks operated in Of course, one of the best ways for businesses to save money isisolation with multiple supply contracts. The lack of astrategy, integrated operation or centralized procurement to not spend it in the ﬁrst place. Implementing effective poli-process limited the client’s visibility to its spend, restrict- cies for demand management can change spending patternsing the ability to track and reduce expenses. IBM’s solu- (including avoiding spending) and result in real cash savings.tion included developing a consolidated, centralized For example, IBM’s changes to its own travel policies (scalingplatform for performing moves, adds and changes, back the allowable class of airline seats and rental cars) quicklyenabling greater visibility of spending activity. Specialists resulted in tens of millions of dollars in annual savings—performed a spend analysis and implemented an overall savings that were instead spent on core competencies, likecorporate telecom sourcing strategy and supporting IT research and global market expansion.processes to leverage spending power and supplier rela-tionship and to provide a structured supplier selectionprocess for immediate cost savings. The team also cre-ated a call center to support all telecom and IT require-ments and established standard procedures/processes to Savings on individual employee purchasesstrengthen change and control issues, and streamline may be relatively small, but they can addoperations. The multifaceted approach led to 15 percentsavings on a year-to-year basis. up to tidy sums (money in the bank) over the course of a year.
6 Smart spending: a new approach that can help you optimize your procurement spendBut even with spend channels identiﬁed and demand manage- already-overtaxed employees become bogged down with (orment policies implemented, companies will not realize the full completely ignore) company policies—creating even greatervalue of potential savings without a strong compliance man- inefficiencies, increased legal exposure and cash leakages.agement program (the extent to which participants in the pro-curement process use the policies, contracts and suppliers that The ﬁnancial settlement cycle encompasses related activitiescompanies put in place). Companies striving to gain full value of delivering POs to suppliers, processing PO and non-POfrom their procurement spending should be achieving compli- invoices, and paying business-to-business transactions. Byance levels in excess of 90 percent. But for many companies, automating these often manual, error-prone processes,compliance performance (particularly for indirect goods and many organizations are achieving new levels of efficiency,services) can be dismal—with nearly half of spending being improved use of payables-related working capital andnon-compliant. This results in signiﬁcant lost savings oppor- increased compliance.tunities for the average ﬁrm and an unnecessary drain on cashﬂow. For example, IBM’s global solution for travel expendi- Other leakages can be identiﬁed and recovered through stan-tures has enabled IBM—as well as our clients—to maintain dardized and automated audit recovery processes, which canvisibility and control over spending in order to realize the full return beneﬁts in the range of 0.05 percent to 0.1 percent ofbeneﬁts of travel policies and sourcing strategies. the company’s total spend. With greater visibility to procure- ment and payables data, controls such as these can lead toFinding cash in accounts payable leakage real-time recovery for current losses, as well as for revenueAnother area of compliance performance that’s coming under leakages in the past. And they can help identify control weak-increased scrutiny as a source of “hidden” cash reserves is nesses in order to implement long-term corrective actions toaccounts payable. Leakages may be found in such areas as reduce probabilities of revenue leakage recurring in the future.overpayments, early payments, duplicate payments, lack ofcontrols over new vendor additions, billing errors, manual Managing and gaining control of the end-to-end payablesprocesses with multiple human touch points, errors in pur- cycle, especially with the help of a third-party provider withchasers’ and vendors’ IT systems, and more. integrated processes and specialized tools, is often a source of a relatively swift recovery that can just as quickly infuse cashIn fact, despite IT investments in powerful, leading-edge sys- into more productive areas. Among other beneﬁts, third-partytems for transaction processing, companies still see gaps in partners can also use their leverage to help bring electronictracking, accessing and updating data necessary for improved payables opportunities to clients, when suppliers have notinvoice processing efficiency. Adding to the complexity are been able to achieve this on their own.government mandates for many industries to create additionalinternal compliance and certiﬁcation processes. As a result,
IBM Global Technology Services 7 Procurement area Typical starting position How smart spending can help Spend under management by Low performers have less than 50% of spend man- Up to 90% or more of spend managed by the pro- procurement aged by the procurement function curement function to ensure best value obtained Compliance with procurement Less than 50% compliance, resulting in lost savings 80% to 90% compliance, ensuring most of the negoti- process and authorized opportunity ated savings goes to the bottom line suppliers Ratio of procurement spend On average, companies report a 469%1 return of total Increase the average savings-to-cost ratio to more savings (reduction and avoid- savings, versus the cost of procurement; low perform- than 700%; individual company ratios may range from ance) to cost of procurement ers may see less than 100%1 return less than 300% to more than 1,000% return, depend- ing on industry and speciﬁc spend proﬁle Vendor payment recoveries Limited controls and recoveries From 0.05% to 0.10% of total spend recoveries from vendors due to errors and other payables leakage Demand management Ad hoc demand management programs From 5% to 10% demand management savings at a category levelSamples of the ﬁnancial beneﬁts possible through smart spending. 3. Leverage: building value from theStrategic sourcing helps reduce total annual spend strengths of othersEach division and location of a major international ﬁnan- The third principle of smart spending involves gainingcial services ﬁrm maintained its own supply strategic leverage of procurement spend, resources and infra-programs/contracts, with few standard policies and structure, both within the enterprise and with the judiciousenforcement practices. Expense reporting capabilities use of third-party providers. Leveraging the experience andand visibility were limited. Working with the client, the reach of third-party providers is helping companies transformIBM solutions team implemented a strategic sourcing procurement—historically a business function of constant cashprocess for travel agency, airline, hotel, car rental, and outlay—into a key source of cash and working capital fortravel and entertainment card. They also implemented a improved margins, growth and innovation. An organization’sglobal delivery system; a standard corporate travel policy; one-time purchase could well be available on a provider’sand a centralized online booking tool that enables visibility strategically sourced contract with the same vendor forto total spend by business unit, supplier and major geog- the same item at a far superior set of pricing, terms andraphy, with enhanced control of spending activity. In addi-tion, the uniﬁed procurement team instituted strategic conditions.sourcing processes and demand management techniquesin the management of the supply base. All of theseactivities—including a comprehensive travel policy thatmandated the use of preferred suppliers—resulted in a17 percent total cost reduction on an annual spend baseof approximately US$30 million.
8 Smart spending: a new approach that can help you optimize your procurement spend providers to increase their value. After all, small- to medium- size companies purchase the same categories of indirect spendEven large global companies with sophisti- that large global enterprises do, only on a smaller scale.cated purchasing organizations can gain Tapping into a third-party’s buying power helps level the play- ing ﬁeld by giving companies volume rates and boosting theiradditional value by tapping the purchasing, competitive advantage. A market-leading procurement servicesresource and infrastructure power of an provider like IBM, with more than US$50 billion of managedexperienced third-party provider. spend, can bring additional spend scale and deeper supplier relationships than a company can achieve on its own. Skilled resources at your serviceProgressive companies also are leveraging third-party In a similar way, businesses must put in place internal efficien-providers’ capabilities to realize superior returns on invest- cies and economies of scale by consolidating and centralizingment (ROI), which can be eye-opening at the very least. For shared services buying and payables operations. These internalexample, IBM Managed Business Process Services for pro- shared services operations often can be further leveraged bycurement typically drives a 300 percent to 1,000 percent sav- using a third-party’s operations hub that provides services toings return on the cost of procurement, depending on the multiple clients.scope of services. For example, while many companies rely on general purchas-High-stakes savings through high-volume purchasing ing experts for a majority of their spend, large providers areOnce a company has proper visibility to spend, it must suc- able to invest in specialists in scores of categories, from rentalcessfully aggregate spending across its enterprise and direct it cars and food services to telecommunications and marketingto a consolidated set of suppliers in order to obtain the most expenses. Sharing the skills of such professionals expands yourvalue (including price, quality and service). While most com- sourcing team, often from a handful to hundreds of highlypanies have already aggregated their own spend, smart specialized experts. With global networks of suppliers, theyspenders look beyond the walls of their own businesses and can zero in on your company’s precise needs using suppliersselectively use the additional volume leverage of third-party your company has not had access to in the past.
IBM Global Technology Services 9Optimized sourcing and supplier managementTapping the resources of a third-party global provider also can Supplier consolidation helps save on facilities serviceshelp secure improved service from your suppliers through the A consumer products company with 10 branches in theaccumulated expertise of its sourcing professionals and its U.S. had a $20M annual spend in facilities services andlarger total managed spend. But such smart spending partner- more than 500 suppliers. In an attempt to improve facili-ships can offer even greater value. For example, by synchro- ties services management, the client turned to IBM to helpnizing sourcing events (such as invitations to bid) at the streamline its supply base, standardize processes andcategory level, providers can pool multiple clients’ require- practices across locations, and improve the performancements. Your company beneﬁts from the provider’s negotiating and efficiencies of the business—all while cutting down onstrength for better terms, multiplying the effectiveness and energy demands and reducing procurement costs.savings across the sourcing process. IBM developed an aggregation model that consolidated all the facilities services—including building maintenance,Providers that manage an expansive, multi-client supplier base janitorial, security, grounds and some environmental serv-also can help you detect risky behavior or questionable issues ices. The team developed key performance indicatorsspeciﬁc to your enterprise. Better yet, they can resolve them (KPIs) that focused on increasing preventative mainte- nance while decreasing critical and corrective workwith the highest level of decision makers, rather than on a orders, reducing unplanned production and equipmentlocal or regional sales level. down time, ensuring safety at the sites, and improving customer satisfaction. IBM implemented the model in each location within eight weeks. The client consolidated its supply base from 500-plus suppliers down to a single supplier. With the supplier now effectively managing the facilities, the client has been able to shift essential resources to core activities. Increasing equipment effi- ciency also produced a dramatic reduction in energy demand. KPIs were deployed for all categories and are measured on a quarterly basis. Within a year, the client realized cost reductions of 15 percent ($3M).
10 Smart spending: a new approach that can help you optimize your procurement spendLeading-edge infrastructure you can affordTrue value isn’t achieved by volume buying and shared Smart spending reaps new working capitalresources alone. In addition, integrated technologies that Vendors of a global manufacturing company were criticalreveal new insights are especially important enablers of of perceived delayed payments. But an IBM data analysisprocurement efficiency and effectiveness. To achieve optimal demonstrated that vendors were actually being paidresults, companies must either invest in a fully functional solu- earlier than their contracts required. The IBM solutiontion in-house or partner with a third-party provider to aug- team also found that the company’s vendor master ﬁle—ment their own solution or provide one tailored to their the central, comprehensive database that holds requiredneeds. Companies that remain committed to purchasing/ information about vendors and determines how theydeveloping, supporting and maintaining their own data cen- should be paid—was improperly interfaced with theters, IT groups, and (often redundant) processes and services payables application, which led to the incorrect payments.face ongoing capital and support expenses. They also face The team replaced the vendor master ﬁle and synchro-costs associated with ramping up and down with demand. nized it with contracted vendor terms, leading to more consistent and compliant payments. The approachGlobal provider partners can remove such costly distractions resulted in a reliable vendor payment schedule with amended payment terms—and far fewer vendor com-by using their own sophisticated procurement systems, plaints. And once on-time payment performanceprocesses, tools, personnel and innovative delivery models like improved, the solution delivered working capital savingscloud computing. And they are able to rapidly respond to close to 1 percent of the company’s annual spend.market changes. Today’s providers’ consolidated transactionprocessing centers, for instance, offer low-cost, efficient andﬂexible operations activities, including purchase-order pro-cessing, hands-free transaction monitoring, vender master ﬁle More than savings—top-line growthupdates and systems administration. Better yet, companies can Smart spending also can serve to help companies’ top-line rev-tap into these state-of-the-art solutions, as needed, with soft- enue growth—not just save money. Highly competent, experi-ware licenses and implementation fees amortized over the enced sourcing strategists understand their markets well andengagement period. can secure the best arrangements to support a growth strategy. But such strategies are not restricted to price alone—there are many other facets to a supply agreement, any one of which
IBM Global Technology Services 11may be the key to competitive advantage, market access or your company. Further, co-marketing dollars may be availablefavored relationships. In addition, the appropriate direction of from suppliers whose brand is strongly aligned with your own.buying power can lead to enhanced service levels at competi- Robust relationships such as these can bring new clients, buttive costs. These can be integrated into improved customer they need to be handled carefully by experienced professionalsservice experiences for your clients (such as call center satis- with appropriate business controls to ensure fair value infaction). Smart sourcing strategies can even leverage vendor sourcing events.investments in a direction that enhances differentiation. Conclusion Companies that move beyond traditional sourcing and pro- curement and embrace smart spending practices have anAs procurement organizations adopt smart opportunity to increase the year-over-year returns they arespending, they are better able to measura- already receiving from their own procurement spend practices and policies, introduce innovation and improve their overallbly improve cash ﬂow and direct it into core competitiveness. Such techniques are part of the relentlesscompetencies. move toward a smarter planet—a more connected, results- driven, data-rich world with systems that are creating elegant real-world solutions: less traffic, environmentally efficient data centers, healthier food, cleaner water, safer cities, and wiserSmart spending (through smart sourcing) can also help use of company resources.enhance revenue growth by nurturing stronger supplier rela-tions. As experienced procurement officers know, some of the Executed in partnership with a comprehensive third-partybest competitive market intelligence—and innovation—comes provider, smart spending can help position your procurementthrough friendly suppliers, including some who may have been organization where it belongs—as a tightly integrated linktreated unfairly by your competitors. A procurement partner between your ﬁrm’s growth and the vendors that are helpingwith multiple supplier relationships within and outside your drive that growth.business sector has access to information and innovative ideasfrom unrelated suppliers that can be leveraged for growth in